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BB sticks to loose monetary policy until June

  • Published at 01:18 am February 3rd, 2021
Bangladesh Bank headquarters in the capital's Motijheel area <strong>Mahmud Hossain Opu/Dhaka Tribune</strong>
Mahmud Hossain Opu/Dhaka Tribune

The decisions were arrived at after assessing the overall demand of the external sector including export-import and economic modelling and forecasting

Is it wise to insist on a loose monetary policy even though the economy is surely roaring back to its pre-pandemic levels? The central bank thinks so.

On Tuesday, the Bangladesh Bank announced that itis continue with the vastly expansionary monetary policy it set in July last year to prevent the economy from a hard-landing for the global coronavirus pandemic for the second half of the fiscal year.

But there has been some calibrations in light of the government’s downward revision of the GDP growth from 8.2 per cent to 7.4 per cent.

The decisions were arrived at after assessing the overall demand of the external sector including export-import and economic modelling and forecasting, said the BB in a statement.

The target for the country’s aggregate money supply, measured by broad money (M2), is set to decrease by 0.60 percentage points to about 15 per cent in June. M2 is a measure of the amount of money in an economy. 

This comes after analysing the energy and non-energy price index and food (including rice) price on a monthly basis by the World Bank and FAO of the United Nations, which indicated that the global inflation will edge up in the near future. 

Inflation would remain within the government’s 5.4 per cent projection as the government has lowered the tax on rice import, it said.

The target of reserve money (RM) is unchanged for the second half but the targets of credit to the public sector particularly the government borrowing from the banking sector was slashed to 31.7 per cent for the second half of the fiscal year from 44.4 per cent previously. 

In the revised MPS, the central bank kept its projection of attaining 14.8 per cent growth in private sector credit even though the growth was only 8.4 per cent in the first half.

The BB kept the private sector growth target unchanged keeping in mind that there is a possibility of restoration of normal economic activities, overcoming the coronavirus-induced impact.

The central bank expects the government bank borrowing would not increase in the upcoming days, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

“But how would the government manage its expenditure in the near future when the revenue income is not increasing.”   

Revenue collection in the July-December period stood at Tk 108,471 crore, which is the lowest in recent years. The National Board of Revenue had targeted to log in Tk 141,225 crore halfway into the fiscal year.

“The revision to the MPS has been made based on the government’s budgetary projections even though the reality is not like that.”

Despite a dismal 9.7 per cent growth in domestic credit until December, the BB fixed the target at 17.4 per cent, lowering it from 19.3 per cent.

The domestic credit growth and private sector credit growth targets set in the monetary policy statement are not achievable.

“Rather, the policy would increase excess liquidity in the country’s banking system.”

An absence of the central bank’s measures to mop up excess liquidity from the banking system may create an asset bubble along with inflationary pressure, said Mansur, also a former economist of the International Monetary Fund. 

The dismal import and term loan disbursement growth in the first half reflects the country’s investment scenario is not improving, he said.

“From where will the credit demand be created?” Mansur questioned.

On high foreign asset increase and lower growth in the domestic asset, the central bank statement said that the high inflow of remittance and significant fall in import payments were the reasons.

The monetary policy target is valueless if it is not implementable, said Salehuddin Ahmed, former governor of the central bank.

He emphasised on the implementation of the monetary policy target and for amping up private sector credit growth.